Chapter 3 GDP Inflation Unemployment CPI Flashcards
Define macroeconomics
Collective actions of entire economy measures movements and output him prices for whole economy domestic and global
What is microeconomics
Individual decision-making utility supply and demand
What are the three goals of economic policy
Maximize economic output and promote production of goods
Minimize the number of people who cannot work
Maintain stable prices
Who is responsible for meeting the three economic policy goals
The government from the government employment act of 1946
How can we meet the three economic policy goals
By aggregation
What is aggregation
The process of putting small numbers into larger statistical measure to track large-scale movements
In the circular flow what does the money flows rely on
Wages rent interest profits
What does the product flows rely on
Land labor capital entrepreneurship
Briefly describe the circular flow
Your output is someone else’s income
Business owners are dependent on customers and vice versa
What are the big three
Gross domestic product
Unemployment rate
Consumer price index
Define gross domestic product
Measures overall output and the economy in dollars
tells us how much stuff we are making
Define unemployment rate
Tells us how many people that want to work and can’t find jobs
Define consumer price index
Tells how much overall prices are rising or falling in the economy
What do the big three measure
Economic performance
Went to the big three help us do
Understand problems that face modern economics
Understand how we measure performance
Gives us direction to what is happening
What does the national income accounting GDP help us do
See the standard of living
What is GDP
Total value of all final goods and services produced within our domestic border within a given year
Do not double count
What counts in GDP
Final goods and services which are only the goods at retail locations
This make sure all value added is accounted for
Goods and services within our domestic borders
What doesn’t count for GDP
Financial transactions
Used goods because they were already counted for in earlier years
Black markets because GDP only counts legitimate transactions
What percent of the economy is black-market part
15% of the economy
How do we measure GDP
The income method
The expenditures method
What is the purpose of the expenditures method
Capture all spending done in the economy at retail
What are the four categories of the expenditures method
Consumption
Investment
Government
Net exports
Define consumption
Spending on stuff
Because category
70% of economic activity
Define investment
Spending by business on capital goods
Most volatile changes most frequently
What should you keep in mind for investment
People buying new houses counts as investment
Business building inventories Count as well
Explain the government part of the expenditures method
Spending on final goods and services by the government
Not welfare
20% of economy
Expenditures method net exports
Exports added to GDP
Imports subtracted from GDP
-5% of economy
We import more than we export
What is the equation for the expenditures method to calculate GDP
C + I + G + ( X - M ) = GDP
What is the income method to calculate GDP
Tracks the income generated
Are the parts income
Wages and salaries Rent Interest Proprietor income Corporate profits
What is the overall goal for GDP
Only Count economic activity once
What are the problems of GDP measuring the social well-being
Industrial pollution Natural disasters and environmental cleanup Leisure time Black-market Household production and activity
Explain industrial pollution GDP problem
Doesn’t count degradation of environment
Social well-being worse due to pollution
Need green GDP which nets out pollution costs
Explain the natural disasters and environmental cleanup GDP problem
Cost a lot to clean up
GDP actually grows
So GDP says we’re better off but we are not
Explain leisure time problem of GDP
Well-being is enhanced by leisure time
GDP does not count this
GDP wants us to work more
Explain the black market GDP problem
GDP does not count the economic activity in black markets
Misses utility created by these activities
Explain the household production and activity GDP problem
A lot of economic activity goes on in the household
GDP it does not take this into account
Is there a perfect measure for our well-being
No
Give an insight to unemployment
Unemployment workers means unemployed capital
This causes hardship for people who cannot find work
People with jobs
Employed
People without jobs looking for jobs and are available to work
Unemployed
People not in the labor force you do not count towards unemployment statistics
People you neither employed nor unemployed
What are the types of unemployment
Seasonal
Frictional
Structural
Cyclical
Seasonal unemployment
People not employed due to seasonal nature of work
Frictional unemployment
People between jobs while looking for another
Shortest type
Structural unemployment
People who lose work because their skills are not needed in current economy
Longest type
Cyclical unemployment
People lose jobs due to economic downturn such as a recession
Totally out of the workers control
What type of unemployment do we care about
Cyclical and structural
What happens to unemployment as GDP decreases
Unemployment increases
what are the problems with unemployment
Discouraged workers and underemployed
Discouraged workers
People that have given up looking for work and are out of the labor force
This makes unemployment rate seem lower than it actually is
Under employed
Workers working fewer hours then they would like and would work more if they could
Hey count as employed thus skewing unemployment rate
How do we make unemployment more accurate
Factor in the discouraged workers and underemployed groups
How do we solve unemployment
Increase economic activity in some way or fashion
Provide people with temporary benefits
Use job-training programs and unemployment agencies to retrain people for work or match them with jobs in the area
Define inflation
A sustained increase in the price level overtime
What is inflation and what does it create
Inflation is unexpected and creates arbitrary
Who Sri the winners for inflation
The borrowers
Who are the losers for inflation
Lenders
Savers
Fixed income folks
Happens to purchasing power as inflation is increased
Purchasing power decreases
What happens because most inflation is expected
People receive regular wage raises these offset the losses in purchasing power
Thanks adjust interest rates to avoid inflationary losses
What interest rate includes inflation
Nominal interest this always changes
What rate stays the same and does not include inflation
Real interest rate
What is the goal to measuring inflation
Accurately measure overall prices
The CPI stand for
Consumer price index
What are the two tips for measuring inflation
Use a diverse weighted market basket of goods and services
Use a base year of prices as a reference point of comparison
What does it mean by diverse and weighted
Diverse means different good types
Weighted means match goods to proper proportions ex. Age groups
What does the consumer price index do
Takes a set of complicated Numbers and turns them into a single understandable number
What must nominal GDP always do for real GDP to grow
Nominal GDP must grow faster than inflation
What should always be taken into account when analyzing the growth of the economy
Inflation
What are the four parts of the business cycle
Trough
Expansion
Peak
Recession
Trough
Low point of economic activity in a cycle
Expansion
GDP growing
CPI rising
Unemployment falling
Peak
Height of economic activity just before a recession
Recession
GDP shrinking CPI falling unemployment rising
How long must GDP shrink for it to be considered a recession
Six months at least
What are most recessions cost by
Falling investment
What is the good number for GDP
3-5% growth
What is the good numbers for unemployment
5 to 6%
What is unemployment always
Sectional and structural unemployment
What are the good numbers for CPI
2 to 3%
What can excessive GDP growth tigger and why
Inflation and because scarcity is more acute
